Small-Business Owners’ Sentiment Perked Up in December, but Gloom Still Looms

Though small business owners finished 2023 in better spirits, true optimism remains elusive.

U.S. small-business optimism improved by 1.3 points on the latest Small Business Optimism Index from the National Federation of Independent Business to 91.9–the strongest reading since July, but the 24th consecutive month below the index’s 50-year average of 98.  

Notably, the share of small business owners expecting better business conditions improved by six percentage points in December to a net negative 36 percent–meaning, the number of business owners who expected poorer business conditions was 36 points higher than those that expected better ones. That’s still better than sentiment in June 2022, when the measure reached a net negative 61 percent.

Additionally, owners demonstrated more bullish expectations for higher real sales, with the strongest reading since January 2022, according to the report. Owners also reported higher nominal sales over the last three months, improving six percentage points from November, and more positive profit trends, improving seven points.  

And yet, two factors continue to hinder small business hopes: inflation and labor quality, which have “consistently been a tough complication for small business owners,” said NFIB chief economist Bill Dunkelberg in a press release.  

Indeed, inflation was the top concern for business owners in the December report, and the net percentage of owners raising average selling prices held steady this month at a net 25 percent–an elevated level. That said, this falls well below the yearly average of approximately net 57 percent in 2022 and reflects inflation’s descent in 2023, from a 6.4 percent year-over-year increase in January to 3.1 percent in the latest Consumer Price Index from the U.S. Bureau of Labor Statistics.  

Labor quality also continues to thwart business owners. Forty percent had job openings they couldn’t fill in December, the same as in November, according to the NFIB’s latest jobs report. This remains “stuck in the historical stratosphere,” per the report–from 2018 to 2020, this share did not exceed 40 percent. The problem is particularly severe in sectors like construction, where job openings increased by nine points in December and more than half of owners “have a job opening they can’t fill.”  

Other challenges persist for business owners: the percentage with plans to increase compensation in the next three months increased to a net 29 percent, reflecting the recent stickiness in wage growth revealed in the monthly jobs report. Meanwhile, a net negative 5 percent of owners deemed their current inventory stocks “too low,” a 5-point deterioration from November.  

Capital spending also weakened in December, indicating that a “recovery in investment is needed to support an improvement in productivity,” according to the report, “but this is unlikely to occur while owners remain pessimistic about future business conditions and lending standards tighten with high interest rates.”  

The upcoming Consumer Price Index expected on Jan. 11, however, could contribute to the Federal Reserve’s decision regarding how long to keep those interest rates at their current level.